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Brazel Receives FINRA Grant for Research Related to Fraud Detection

The research is funded by a $330,000 grant from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation to Brazel and co-researcher Keith Jones, assistant professor of accounting at George Mason University. In previous research, Brazel and other colleagues explored the value of looking for inconsistent patterns between the nonfinancial measures, such as facilities growth, and financial performance, such as revenue growth, as a way to detect firms with high fraud risk.

�We are pleased to be able to support research that is intended to improve the ability of regulators, auditors and investors to detect financial fraud,� said John Gannon, executive director of the FINRA Investor Education Foundation. �By developing a new tool to verify the accuracy of a public company�s financial statements, we believe this grant will help investors make more informed investment decisions and eventually provide greater protection against the potential for fraud.�

�Detecting fraudulent financial reporting is a topic needing further research, because presently we know so little about the practicalities of fraud,� Brazel said. During the next year and a half, Brazel and Jones will conduct research aimed at testing whether NFMs can be used as a benchmark for evaluating the validity of financial information and, in turn, improve fraud detection. Some of the NFMs that will be considered include the number of employees, retail outlets, facilities, customers, products, and patents.

Professors Brazel and Jones hope to answer three key questions while conducting their research:

  • Do fraud firms tend to exhibit greater inconsistencies between their reported financial results and related NFMs than non-fraud firms?
  • Are financial statement auditors currently, or should they be, using NFMs to detect fraud?
  • Can investors use NFMs to make better investment decisions?

Additionally, a website will be created containing a tool that can be used by investors, auditors, and regulators to analyze the consistency between a given firm�s reported financial results and related NFMs.

�Our studies attempt to answer a very simple question: Can operational data or NFMs serve as a benchmark when evaluating the validity of a company�s financial results?� Brazel said. �When inconsistencies exist, especially larger inconsistencies, our preliminary findings suggest that the financial results may be too good to be true.�